Invest With Your Head, Not Your Heart

During the heady days of 50 percent returns on investments in the stock market and triple-digit share prices, it seemed everyone--from your mailman to your coworker--had investing tips to share, or a stock to pump. But sometime last year, with their spirits sinking as fast as the price of the stocks they'd pitched, the same people who were ready to bet their life savings on the latest hyped-up, high-tech stock were suddenly silent.

By then it was too late. Americans lost millions of dollars when the market turned south--and that was before Enron collapsed. You can blame the company whose stock you bought for failing to turn a profit, or the analyst for failing to disclose his firm's financial ties with the company or the financial "expert" who recommended the stock. But investors have to accept some of the blame themselves for not doing their homework. And with so much material out there and so many tools available these days--many of them free of charge--there's no excuse for not educating yourself.

The old adage holds true: "Fool me once, shame on you. Fool me twice, shame on me."

"Most people don't really understand money as well as they should because they approach it from an emotional standpoint," says Ginita Wall, a financial planner and author of several books on personal finance. Case in point: investors who were so caught up in the euphoria surrounding the skyrocketing tech stocks that they bought when the price was high, then panicked when the price plummeted and sold at a loss.

That's not an investment strategy Wall or other financial experts recommend.

"It's important to have a systematic plan, to stay the course of asset allocation rather than trying to time the market," adds Michelle Rappa, senior vice president for retirement at Seligman Advisers. "People have more of a concern now than they did. I think they thought it was easier to do their own asset allocations, but now they are just looking for a solution on how to get to retirement, and they want help designing a plan."

Financial experts, for the most part, recommend investing in the stock market for the long term, but putting money into bonds or a money-market account if you're just investing for the short term or you're saving for a new home or another big purchase and don't want to risk losing any of the principle amount you invested.

That methodology was a hard sell to investors during the late 1990s when stocks were soaring. "Investors would say 'Why invest in a bond earning 7 percent when I can earn 25 percent in the market?'" remembers Wall. "Now that they have seen that you can lose 25 percent in the market, too, those bonds looks pretty good." Adds Rappa: "You need a good, specific asset-allocation strategy, so you don't have to worry about one sector underperforming and you're more likely to get a more stable return over time."

Seligman offers a Time Horizon Matrix strategy [information at] that allows investors to compare different investment options, from large-cap stocks to corporate bonds to Treasury bills. The investor selects a time frame--a 25-year retirement plan, for example--and the asset allocations shift each year to lower the level of risk as the investor approaches his goal. Seligman, and a number of other funds, also offer options for investors to have a specific amount automatically deducted from their paychecks or bank accounts.

"The best way to get started is through direct deposit," says Wall. "A lot of people don't understand the significance of how much money they save now can mean in the future. Hundreds saved today mean thousands in retirement."

One of the hardest groups to reach are those in their 20s. Wall has a client who is 26, male and single. "He said to me 'If I have $5 in the bank, it's a six-pack waiting to happen."

She eventually convinced him otherwise, helping him to set aside money each month for his 401(k). "He had just been concentrating on being single and having a good time. But if he had not come in when he did, he would have waited until he had a wife and child to worry about, too."

Convincing Americans to invest their money and leave it alone for several years is not easy--especially when the market takes a dive and the investment value drops. "I get these comments from people like: 'I keep putting money into my 401(k) and it keeps going down. I am going to stop putting money in'," Wall says. "I tell them, that's like saying, the clothes are half price so I'm going to wait until the sale is over and buy them at full price."

By putting the same amount of money into the market at specified times throughout the year, investors benefit from what is called dollar-cost averaging. Basically, you buy on the lows and the highs so you are able to buy more stock when the price is low, and then make more money when the price increases again (since you now own more shares). That means a temporary drop in the value of one stock, or one fund, may be good news (as long as it is, indeed, temporary--and you continue buying, but don't sell).

"Investors should be starting with retirement planning, not day trading--that should be the icing on the cake," says Wall. "And you shouldn't even start with the cake--that's dessert."

Whether they've educated themselves online or in the bookstore, sought advice from financial planners or simply been burned by trying to time their investments to market movements, investors seem to be getting that message.

According to a March 2002 ShareBuilder Report, nearly three quarters of long-term investors surveyed did not change their investing style during the second half of 2001, even as the market dropped. In fact, long-term investors were less likely than other investors to become more conservative in their investing approach during that same time period. And more long-term investors actually increased their investments in stocks last year, versus other investors (long-term investors are defined as those individuals who reject the belief that successful investing requires timing the market).

Last month, investors put another $12.8 billion into stock-market funds, with half going to small-cap and aggressive-growth funds, while large-cap growth funds received one quarter of the total equity flows, according to estimates by AMG Data Services.

"A lot of investors in it for the long term understand that we've had some good years and some bad years. It does sometimes rain, even in a sunny climate," says Wall. "None of us really expected the rain to last this long but, by and large, many have weathered the storm."